Spread Betting Financial Markets For Beginners

Summary:Spread betting financial markets can be a fun and
profitable experience. It can also be a risky and nerve-wrecking
experience. The following pages describe the markets for a beginner,
even though it isn't really for financial novices.

Spread betting is more usually associated with sports than financial
markets. The name should be a giveaway. It is probably the area of stock
markets and financial assets that is least like investing and most like gambling.

The industry was created in the United Kingdom and it's most developed companies still operate there.

Unlike most aspects of finance - especially for the private
investor - spread betting financial markets offers the potential for
incredible wins and increases in fortune in very short time periods. Every now and again there will be a spread betting success story that becomes famous within the financial world and typically the amount of profit will be almost eye-watering it is so large!

However, those same risks that provide the potential for massive
windfalls also has the potential to produce devastating losses. This is
not an area for the risk averse, faint hearted or financially insecure. It is also worth pointing out that potential players will find a firm grasp of numbers and mathematics to be very useful.

Event though it was first used for gambling on sports, it is based on principles of financial derivatives. Which if nothing else should remind the reader of the risk warnings
above and requirement for understanding numbers. While derivatives have a
legitimate role in financial markets and trade, they are most
associated by the public for speculation and leverage (borrowing).

Spread Betting For Short Selling?

One feature of spread betting financial markets that can be useful is
the ability to take a negative view. In traditional investing, an
individual can buy stocks, units or an index if he or she believes that
prices will rise. This is 'going long'.
But should a person believe that prices will fall, their only
means of benefiting from this outcome is to sell assets that may be
impacted and have no involvement in the losses. In other words, for most
investors, they can only hope to stand aside and not lose money.

For more aggressive participants in the stock, commodity or currency
markets, they can also sell the asset and 'go short'. Spread betting
offers a relatively straightforward method of
short selling
and making money if prices do indeed fall.

To put this into sporting context so that it is - hopefully -
easier to understand, a gambler may not know which one of perhaps three
horses may win a race, but he or she may be very sure that several
others in the race are hopelessly outclassed. This is a method to back
the opinion that a horse will not win.

Therefore, this has the power to put an investor / trader /
gambler in the same sort of position that a bookmaker would normally
have - able to benefit from any outcome. In financial market terms, an
investor or trader can now back any outcome much as an investment bank
or hedge fund might do!

This is very important because the typical investment fund is 'long only' which means that profits are made only when prices rise. There are actually very few bear funds. We humans are very optimistic creatures! And yet, stock markets are known to take some very wild swings and prolonged periods of recession take their toll on prices. The ability to take a position in a falling market is thus very important.

Take Your Pick...

The industry has matured enough in recent years that it is now
possible to take part - long or short - in most financial assets and
markets. Most major and many minor stock market indices, most
currencies, many commodities and most large corporations in major
countries can now be traded. In other words, if there is an asset of
note, and it is quoted on a capital market somewhere, there is probably a price being quoted.

Savvier investors reading this may realise that there is
potential to use spread bets as hedges for large portfolios if required.
A slightly different product, a CFD (contract for differences) is often used for this purpose as well.

Since regulation of financial products is generally quite strong, it
will come as little surprise that there are rules in place as to whom
can and cannot bet. Generally, spread betting companies are required to
'Know Your Customer' as would be the case for any other financial
product.

However, they need to be sure of an above average grasp of
financial topics as well. The bar above which potential clients need to
pass is, "relevant experience of dealing in financial markets". Of
course, that could mean almost anything, but practically it is an
acknowledgment that clients really need to understand that the risks can
be very high indeed.

Along with the success stories mentioned above, there are also a great many spread traders and day traders that 'blow up' and not in a good way. If the market price moves against a position quickly, it can be impossible to sell at any price and the concept of unlimited losses can become very real indeed. There are ways to limit these losses, of course, but if there are multiple open positions that go wrong simultaneously, everything can go wrong very quickly. Margin calls can lead to bankruptcy.

Therefore, spread betting is profitable for many, not all, but the risks being taken are high and the potential for unanticipated problems is also high.